Where Policy, Economics Intersect

The explosion of digital content, mobile computing, and other advances has prompted a new wave of policy debates and legal concerns related to the use of technology. Government agencies in the United States and the European Union, for instance, are considering tighter regulations on how consumers’ personal and financial data are collected, stored, and shared. 

The potential benefit of these policies to consumers is clear, but for companies whose business models rely on new data-centric applications and digital technologies, increased oversight could have a chilling effect on their ability to access capital markets, invest in R&D, and launch new products and services. 

In this article, Managing Principal Laurits Christensen discusses the work he and other Analysis Group professionals have done with academic affiliate and Harvard Business School Professor Joshua Lerner, exploring the economic impact of policy and legal decisions on the funding and implementation of new technologies, such as cloud computing, and on R&D investments.

Copyright Concerns and R&D

In the study “The Impact of Copyright Scope on Investment in Cloud Computing Ventures,” we assessed the effect of copyright policy changes on the willingness of venture capitalists to invest in cloud computing (in which data and applications are hosted on a network of remote Internet servers). Specifically, we considered the 2008 decision in The Cartoon Network, et al. v. Cablevision in which the court ruled that the pay cable service’s Remote Storage-Digital Video Recorder did not infringe the plaintiffs’ copyrights.

The decision was widely seen as clarifying the issues associated with intellectual property rights and cloud computing enterprises in the United States. Our research found that venture capital (VC) investment in cloud computing firms increased significantly in the United States compared with the European Union after the Cablevision decision. The decision led to additional incremental investment in US cloud computing firms that ranged from $728 million to approximately $1.3 billion over the two and a half years after the decision. This additional investment may be the equivalent of $2 billion to $5 billion in traditional R&D investment when considered against the findings of studies looking at the enhanced effects of VC investment relative to corporate investment.

Privacy and Online Advertising Investment

In another study with Professor Lerner, “The Impact of Copyright Policy Changes on Venture Capital Investment in Cloud Computing Companies,” we examined the impact of the European Union’s evolving privacy policy, the Privacy and Electronic Communications Directive, on investment in online advertising companies in Europe.

Drawing on data from a widely used investment database, we estimated multiple “difference in difference” regression models; these econometric models measure the impact of an event at a given period in time, controlling for other factors. In this case, the models were designed to test for a statistically significant decrease in investments after the directive was passed. We found that the EU privacy directive has led to an incremental decrease in investment in EU-based online advertising companies of approximately $249 million over the eight and a half years from passage of the directive through the end of 2010. This decreased investment may be the equivalent of approximately $750 million to $1 billion in traditional R&D investment when considered against the findings of studies looking at the enhanced effects of VC investment relative to corporate investment. 

As Professor Lerner noted in the research report, the findings suggest that policy decisions involving the use of personal data online can have significant effects on investment and innovation. Policy debates about the merits of too much versus too little regulation will invariably involve some consideration of trade-offs – for instance, balancing the need for greater restrictions on how firms acquire, manage, and share private data against the benefits of the free flow of information, including customized user experiences and continued innovation. Careful, comprehensive analysis can help establish a fact base and quantify the possible economic impacts of regulatory change, thereby bringing clarity to policy discussions. ■